While all other energy commodities markets around the world have seen a severe dip in prices, RINs prices in the US are steady. What is causing the RINs market in the US to react this way and what is the outlook?
Join John Demopoulos, vice president of North America refined products and Paul Niznik, senior consultant for Argus Consulting Services specializing in the US biofuels market, as they discuss RINs market volatility and what’s to come.
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John: Hello and welcome to Driving Discussions. In this series, we'll discuss the forces that affect road fuels globally. And in this episode we'll be discussing the volatile RINs markets in the US. Driving Discussions is brought to you by Argus Media, which as many of you know, as a leading independent provider of energy and commodity pricing information. My name's John Demopoulos and I'm the Vice President of North American Refined Products here at Argus. And with me today is Paul Niznik, the Senior Consultant for Argus Consulting Services specializing in the US biofuels market.
Paul: Hi John. Happy to be here.
John: Great to have you here to talk about the RINs markets. Now we're going to be discussing RINs, and to give everybody a real sense for how RINs operate and what they are. These are really tradable credits, born out of the US renewable fuel standard and it's really all a program designed to, incentivize the blending of biofuels into the fuels pool. And now Paul, we've seen commodity prices in general falling dramatically over the past several weeks, as a result of the Covid outbreak and the global response to the Covid outbreak. And yet RIN prices have held up very well. Can you explain what's going on there?
Paul: Well, two things. The RINs demand is going to be proportional percentage of refined product usage in the United States. So, some things do move proportionally with that. So, in the case of ethanol, it's blended between 9% and 10%, sort of as part of the sort of normal use of gasoline. So when gasoline usage goes down, biofuels consumption and ethanol goes down proportionately. And so does the RINs production and it moves just in the right way to sort of keep the system in balance. That's gonna help D6 RINs that come from ethanol stay in their sort of normal price range right now with the same amount of tension on the marketplace. That's the good news for them, in general. And then for biodiesel RINs in that by biodiesel that covers renewable diesel and biodiesel. Those D4 RINs actually work and have their prices govern to cover the spread between the feedstock costs of biodiesel plants like, soybean oil. And, so they, they cover the spread between the cost of the biodiesel and the diesel. The soybean oil prices have sort of moved fairly reasonably with diesel, diesel not being as volatile right now as has been gasoline. And therefore that spread not changing much means that the D4 price hasn't spread...hasn't changed that much. Now certainly demand for those RINs has gone down. As I said, you know, when total petroleum usage goes down, the RINs demand goes down and therefore we're seeing some feedback into the biofuels space. But in terms of the RINs price, they're behaving fairly reasonably, right.
John: And the supply of RINs into the marketplace. I mean, I guess you're saying that the supply of the D6 ethanol RINs has gone down sort of proportionately to the refiner's demand for them. But what about the...some of the others, the D3 for example, how are prices reacting?
Paul: That's not as happy a story. The problem there is that, there is neither a feed...an economic feedback to the production of the renewable natural gas that governs that space, like there is in the D4 space. Nor is, you know, nor is there a proportionate decrease in usage of those renewable natural gas products or production of those products. You've got to imagine that most of that renewable natural gases comes from landfills. They're going to make gas on Monday, Tuesday, and Wednesday, just like they always have. You can't turn them off. They're under offtake contracts that are pretty rock solid. It's...they have to take and therefore the RINs are showing up on the marketplace. Whether or not petroleum as a whole is going downwards in usage and the consumption side, which also helps govern whether or not those RINs can be in the marketplace, probably hasn't gone down as much as overall petroleum usage because these, they feed two very distinct markets, mostly in the transportation buses, inner-city transportation, those run on CNG. They could be biofuels fed and bio gas fed or, waste trucks, [inaudible 00:05:03] trucks. And those two services probably haven't been diminished as much as gasoline demand. And therefore those RINs are unfortunately oversupplying the market a bit. And that's been very tough on their price. We have seen a 20%, 30% drop in those prices in the last couple of weeks over Covid.
John: And Paul, you say, you know, D3s have been relatively weak and there's a bit more strength in the D4 and D6 markets. What does this all mean for the overall renewable volume obligation, the sort of written costs that refiners have to pay for every gallon of fuels they produce?
Paul: Yes. So that renewable volume obligation, the RVO per gallon, that's a sort of a market standard cost that's either people have an eyeball on for their compliance cost or that's used in the marketplace to pass along the cost, that number has been pretty steady. Of all the numbers that are changing during this pandemic, that number stayed pretty small and pretty relatively traded with a small range. So it hasn't garnered a lot of attention. Though as you may have heard, there are some governors are looking to try and bring assistance to the petroleum sector. Perhaps by obviating the necessity of the [inaudible 00:06:38] for this year, some sort of waiver. Of course, that would impact on whether or not those few pennies per gallon will be in play in the marketplace.
John: And, that together with the waiver of some small refinery exemptions has tended, I guess, to support pricing. And, and I suppose the bigger point here is that you know, small tweaks here and there are one thing, but it's really politics that kind of dominates the direction of the RVO isn't it? We likely to see much in terms of political change with respect renewables over this administration, I guess administrations coming.
Paul: Yeah. I think that's a really good question that the market was already going to have to deal with on top of some of the Sturm and Drang that's in the marketplace now. I... There was a lot on the table already. We had, as you mentioned, the small refinery exemptions, which allowed some refineries, for a few years an additional number of refiners to not be obligated and not have to buy RINs. That was an increasing percentage for a couple of years that seemed to have gotten the legs kicked out of it, with some court clarification, but not yet. And of course, the politics around that sort of continue to keep it as one of the balls that's in the air. And then we have an election in the fall and some policy items that still didn't have the boxes checked, we have a requirement by the EPA...I mean a requirement for the EPA to clarify some rules past 2020. It's not that the RFS ends in 2020, but that some of the rules governing on what the volume should be past 2020 are in the hands of the EPA to make a rule-making, to give clarity. They're supposed to have already sort of issued rule-making on that quite a few years ago and they're late. But that's not too unusual for the EPA. And it looks like the EPA won't get to that in a timely manner before the next administration change. Of course, having a different administration could really change the outlook of the RFS past 2022 in theory. And we have seen that this current administration, which differed strongly on the RFS from the last did try and do a couple of changes along the way. Of course, for every ying there's a yang. And, on the other side of the policy and politics argument from this administration is the Democrats and then a healthy portion of Republicans in the Midwest serving agricultural interests that have really been the blockers for any policy change over the last two to three years. And that's a particular level of dynamic. The coalition, a bipartisan coalition of democratic greens and Midwest Republicans banding together to keep changes from happening in the RFS, it seems like a very strong, sturdy and effective coalition that would outlast any administration change. And so we probably are not going to see a huge amount of changes at a macro level, even with the White House changing hands potentially in the fall.
John: Suddenly like caught between a rock and a hard place is what springs to mind. What about the...what about other politically dominated biofuels masses over the coming year? You know, we've got, LCFS, TCI, all sorts of things that I guess are still up for discussion. How, how do you see the stories of the rest of 2020 unfolding?
Paul: Well, the LCFS is a big story. Really, it was the story of 2019. The prices, they're really getting near the top of where the market can go. There's a...they're gonna formally install a cap price there for the California LCFS and we're already really there. And that price has actually also been very durable during the recent problems. And with that price where it is, $200 around and being effective in the marketplace, it's really driven a lot of the demand for product to go out that way. That's been very impactful to the marketplace. California last year moved to almost a 22% replacement of diesel with biodiesel renewable diesel. So a big cut overall there in their diesel demand. And we're seeing more of these types of policies spring up. So Oregon has one in existence. British Columbia has one in existence, and they're very effective and long-playing. They're very durable. The politics there is a lot less uncertain. No one's expecting California, for instance, to suddenly shift Republican or become a petroleum-friendly state. So we're expecting that those LCFS type dynamics in those types of states to continue as they are and be increasingly impactful. We're looking, right now, at Canada shifting to a nationwide LCFS, they're in the middle of a rule-making process there. That's going to be a hugely impactful policy long-term and people are certainly keeping an eye across the border there for what that's going to do to demand for fuels here and then effect on prices here. Meanwhile sort of a little more under the radar is the northeast corridor, the renewable greenhouse gas initiative states, the RGGI states that already work on reducing emissions from power in the entire northeast are proposing to move into regulating emissions in the transportation sector on fuels. That would be maybe something like an LCFS or maybe something more like a cap and trade, but in any case, would be very impactful on demand. And again, those are areas which no one has any doubt about their politics. And those are areas when you put up a state policy that can be around for a long time and be deeply impactful, at least if you're using California as a model.
John: And let's just suppose for a minute that the current low price environment for fossil fuels sticks around for a while, as I think many of us expect it to. Does that allow programs like these to continue forward as planned or does it start to throw up obstacles to the further penetration of biofuels into the overall US fuel pool?
Paul: So for some markets it does. And for some fuels more than others. I think, when we think about alternative fuels, like electric vehicles, people do make that purchasing price an issue and it's made more by the individual. So for anyone buying an electric vehicle, an extra $10,000 cost might put it well out of price range and a small...a low fuel price would certainly make any gas-guzzler more attractive than a $10,000 extra cost on a car. Whereas a lot of these programs will pass-through costs on biofuels at the pump for a few pennies a gallon. For instance, we talked about the RVO being two to three cents that has to be passed here. In California, of course, that adds up to quite a bit more. You're looking more at around 17 cents on the LCFS plus some...the RVO from the RFS on top of it, you're looking at almost 20 cents. Even then when you consider the taxes on the California gasoline, people aren't noticing it really, and it doesn't tend to push back. Now at the refinery level, when they feel price pressure, they may make some decisions, particularly not so much on existing fuel usage. You know, they're not going to certainly not gonna stop blending at 9% to 10% ethanol. But on expansion of projects, on the consulting side, we do a lot of due diligence helping companies make decisions on investments, whether the refiner's thinking about stepping into the biofuel space with some renewable diesel production or its independent investment on expansion or new technology biofuels. When we see those companies feeling some pinching, maybe also worried about blending costs, you may see some push-back against future development. But so far no. And so far, actually, 2020 has been a very busy year for investment work that we do here and has been very successful for some companies in launching some new biofuel projects.
John: Well, that's great to hear. I know we all want to see those investments in biofuels continue. Paul, thank you. And if you enjoyed this podcast, please do be sure to tune in for other episodes in our series Driving Discussions. For further information about the US refined products markets, including daily prices and RINs coverage, you can check out Argus US products and Argus America's bIofuels. And to learn more about Argus Consulting Services, do visit www.argusmedia.com/consulting.